XtremeSpeakFreely

But does anyone remember the post or thread (I forget) about how when you give a bank money, they make money off of it and somehow create money out of thin air? I'm chatting with a coworker now about it and I can't find the thread.

Commercial banks are allowed to engage in propriety trading for their own corporate treasuries and private gain. As history has shown us, banks tend to take much greater risks when it isn't their own money that they are gambling with. After the Great Depression a law was passed called the Glass-Steigall Act that banned commercial banks from engaging in investment banking (aka trading) and in 1999 it was repealed under Clinton to allow the merger of Citicorp and now all the big banks trade with our deposits. This is why Citigroup had to be get a $305 billion bailout--their risky investments in mortgage backed securities completely blew up their balance sheet leading to their insolvency. Just about everyone still believes the banks are insolvent because of the risky assets they hold (but are allowed to write off their books due to fancy accounting rules). It's a major part of the problem.

google fractional reserve banking

Yeah, but thats not really making money out of thin air. The banks are making loans and collecting interest. Collecting interest off a loan is much much more valuable to society than hording deposits to trade for private profit. We have seen what the latter leads to.

No no, someone made a post (I think it was you thunder?) about how money is just created out of thin air.

Actually it is. If you check the balance sheet of a bank, they can increase the money supply by lending. they could charge 0% interest and still expand the money supply.

Say they get a deposit of $100. From that $100 they can lend out $90(10% reserve laws). Out of that $90 the bank can lend even more because each loan they give out is listed as an asset(before lending its a liability) on their balance sheet. For example, bank lends out $90, out of that $90 which has become an asset, 10% has to be reserve so now the highest they can lend out is $81. Continue the process and from the original $100 they can increase the money supply by quite a lot. It is one of the ways the Fed actually encourages banks to increase the nation's money supply during times of distress. This way the fed doesn't have to get directly involved. You cannot have a lot of growth in the economy without debt so fractional reserve banking is certainly a key for that but it gets dangerous when you allow commercial banks to get deeply involved in a very risky market run with virtually all debt i.e. derivatives market

Well, it could be the Federal Reserve loaning trillions of $$ in zero interest loans to banks that then use that money to buy treasury notes and bonds which is like printing money because the Fed ends up "loaning" money to the Treasury. Actually, it's worse than printing money because we still have to pay the banks interest on the bonds vs. just getting the money without going through a third party.

It's like this:

I deposit 1000$ in bank A. Bank A needs to keep 100$ for a reserve and can loan 900$ based on the 1000$ in the deposit. Because over 95% of today's money exists only as numbers in computers, your initial 1000$ remains in that deposit and you can view the 1000$ in your account as if it's there. So now you have 1000$ in the bank and 900$ loaned on the basis that the bank has that 1000$ as a guarantee (they bet that not everyone will withdraw their deposits at the same time). The 900$ is created on the promise that the borrower will return that money with interest. If he defaults on that loan, then the money was created not only out of thin air... but from the void. It has absolutely nothing backing it up.

But here's the thing with fractional reserve banking. Those 900$ which were loaned will eventually end up in a bank... bank B. They will hold 90$ for a reserve and loan out 810$, which end up in bank C, which keeps 81$ and loans out 729$. And so on until from that initial 1000$ deposit the money supply will increase to 5-10000$. Money is created out of thin air.

http://en.wikipedia.org/wiki/Fractional-reserve_banking

Indeed but whats worse is the money doesn't even need to end up at another bank to repeat the process. If it does end up at another bank, which it most likely will, the process just multiplies that much more. Its not hard to see why many classical economists are opposed to the idea but its hard to deny its one of the main causes for such growth over the past century.